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NY Times attack by innuendo: Commodity price speculation edition

I've written a few times [e.g., 1 , 2 , 3 , ] about commodity price speculation, arguing that speculation hasn't been the cause of volatility in recent years.  My views on this haven't changed, but I'm open to new arguments for why I and legions of other economists might be wrong.  Overall, I haven't found this topic to be a very interesting, because those arguing that Wall Street caused the food price crisis, or caused oil prices to spike, really haven't presented any kind of logical argument.  All they do is point to the fact that Wall Street has gotten into the commodity game more than they have in the past.  But this isn't news and it falls far short of an explanation for how their trading activities are affecting prices. I haven't seen a serious study claiming a link, only magazine articles and opinion pieces, all thin on substance.  Professionally, I don't see this as interesting work.  This review lays things out pretty clearly. I

Fixed Effects Infatuation

The fashionable thing to do in applied econometrics, going on 15 years or so, is to find a gigantic panel data set, come up with a cute question about whether some variable  x  causes another variable  y , and test this hypothesis by running a regression of  y  on  x  plus a huge number of fixed effects to control for "unobserved heterogeneity" or deal with "omitted variable bias."  I've done a fair amount of work like this myself. The standard model is: y_i,t = x_i,t + a_i + b_t + u_i,t where a_i are fixed effects that span the cross section, b_t are fixed effects that span the time series, and u_i,t is the model error, which we hope is not associated with the causal variable x_i,t, once a_i If you're really clever, you can find geographic or other kinds of groupings of individuals, like counties, and include group-by-year fixed effects: y_i,t = x_i,t + a_i + b_g,t + u_i,t The generalizable point of my  lengthy post  the other day on storage and

Can crop rotations cure dead zones?

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It is now fairly well documented that much of the water quality problems leading to the infamous "dead zone" in the Gulf of Mexico (pictured above) come from fertilizer applications on corn. Fertilizer on corn is probably a big part of similar challenges in the Chesapeake Bay and Great Lakes. This is a tough problem.  The Pigouvian solution---taxing fertilizer runoff, or possibly just fertilizer ---would help.  But we can't forget that fertilizer is the main source of large crop productivity gains over the last 75 years, gains that have fed the world.  It's hard to see how even a large fertilizer tax would much reduce fertilizer applications on any given acre of corn. However, one way to boost crop yields and reduce fertilizer applications is to rotate crops. Corn-soybean rotations are most ubiquitous, as soybean fixes nitrogen in the soil which reduces need for applications on subsequent corn plantings.  Rotation also reduces pest problems.  The yield boost on

Weather, storage and an old climate impact debate

This somewhat technical post is a belated followup to a comment I wrote with Tony Fisher, Michael Hanemann and Wolfram Schlenker, which was finally published last year in the American Economic Review .  I probably should have done this a long time ago, but I needed to do a little programming.  And I've basically been slammed nonstop. First the back story:  The comment re-examines a paper by Deschanes and Greenstone (DG) that supposedly estimates a lower bound on the effects of climate change by relating county-level farm profits to weather.  They argue that year-to-year variation in weather is random---a fair proposition---and control for unobserved differences across counties using fixed effects .  This is all pretty standard technique. The overarching argument was that with climate change, farmers could adapt (adjust their farming practices) in ways they cannot with weather, so the climate effect on farm profits would be more favorable than their estimated weath

What is the value of symbolic action?

Robert Stavins argues that largely symbolic actions do not help and may ultimately hurt the cause for action on climate change (HT Mark Thoma ): Over the past year or more, across the United States, there has been a groundswell of student activism pressing colleges and universities to divest their holdings in fossil fuel companies from their investment portfolios.  On October 3, 2013, after many months of  assessment, discussion, and debate , the President of Harvard University,  Drew Faust , issued a long, well-reasoned, and – in my view – ultimately sensible statement on “fossil fuel divestment,”  in which she explained why she and the Corporation (Harvard’s governing board) do not believe that “university divestment from the fossil fuel industry is warranted or wise.”  I urge you to read  her statement , and decide for yourself how compelling you find it, and whether and how it may apply to your institution, as well.   About 10 days later,  two leaders of the student movement a

Desperate times bring desperate measures

Update : Edwardo Porter makes the same point, only he does a much better job of it. A bit off topic, but the impending government shutdown has me thinking in simple game theoretic terms. Some on the left (and right) seem to think that Congressional actions are "crazy" as government shutdown is likely to hurt the Republican party.  After all, that's what happened the last time when Newt Gingrich shut down the government in 1995, which led to his demise and helped Clinton win reelection against Dole in 1996. It's probably fair to guess that, while this time is different (isn't every time, at least a little?), the shutdown will likely hurt the Republican party.  So why are they doing it?  Are they really crazy?  Has the radical fringe taken over and leading us over the cliff to disaster? Well maybe. But maybe their actions, even if potentially disastrous, are rational and not surprising given the circumstances.  It seems to me the Republican party is in a de

Climate Change and Resource Rents

With the next IPCC report coming out, there's been more reporting on climate change issues.  Brad Plumer over a Wonkblog has  nice summary  that helps to illustrate how much climate change is already "baked in" so to speak. I'd like to comment one point.  Brad writes "Humans can only burn about one-sixth of their fossil fuel reserves if they want to keep global warming below  2ÂșC ." I'd guess some might quibble with the measurement a bit, since viable reserves depends on price and technology, plus many unknowns about much fossil fuel there really is down there.  But this is probably in the ballpark, and possibly conservative. Now imagine you own a lot of oil, coal and/or natural gas, you're reading Brad Plumber, and wondering what might happen to climate policy in the coming years.  Maybe not next year or even in the next five or ten years, but you might expect that eventually governments will start doing a lot more to curb fossil fuel u

I've been touched by genius

Awesome news.  My colleague David Lobell just won the MacArthur grant. http://news.stanford.edu/news/2013/september/macarthur-fellowship-awards-092513.html Seriously, David is a fantastic colleague and very deserving of this award.  Also, I think we have some great new research in the pipeline and with any luck this might help bring some exposure to it.

GGG is among the top 200 most influential economics blogs (just barely)

I just stumbled upon this ranking via Econobrowser , which is number 10, and one of the blogs I really like to visit. Greed, Green and Grains is number 199. Well, I guess that's not a crown jewel, but I'll take it, especially given how my little niche isn't one of the biggest fields of economics and how little time I have to dedicate to this thing.  I realize posting is thin.  I will try to post when I can, but my commitments are just too many to post much these days.   G-FEED , which is steadily growing in influence, will have more posts because there a number of us contributing, some of whom are rapidly becoming the rock stars of science, with some major publications and media attention.

Crop insurance under climate change

How should crop insurance premiums adjust to a changing climate in order to remain actuarial fair? Short answer:  Very slowly. That seems pretty obvious to me, and hopefully to anyone who thinks about it for a few minutes, even if you think climate change is ultimately going to have big impacts.  Moreover, the way crop insurance premiums are already determined---as a function a farmer's own recent yield history---gradual adjustment of premiums will take place naturally. So, what should USDA's Risk Management Agency do, if we think nasty crop outcomes like last year are going to be more frequent going forward? Well, I'll abstain from making a recommendation, but I will say that if they do absolutely nothing, there will be no significant budgetary implications. None of this is to say that there might not be other ways to improve crop insurance. Update: So, if this issue is so unimportant, why do I mention it?  Because I'm seeing and hearing the question a lot

Integrated assessment models: What do they tell us about climate change policy?

" Very little ,"  according to Robert Pindyck in a new working paper. Integrated assessment models (IAMs to practitioners)  stitch together projections from climate models, energy sector models, agronomic crop models, models of other sectors of the economy, and partial or general equilibrium models that account for price and interactions with the broader economy to derive a more comprehensive evaluation of costs and benefits from climate change. Pindyck is understandably frustrated with the false sense of precision these models can impart.  As he explains, a few reasonable tweaks of any of these models can give very different estimates about the social cost of carbon---the price we should pay, but typically don't, for emitting CO2. Pindyck raises some good criticisms about IAMs, or at least says out loud a lot of things that many economists have quietly said to each other.  I'm glad he's bringing our varying assumptions and wildly varying cost-of-carbo

GMOs: Franken food or technological savior?

Amy Harmon has a great in-depth story in the New York Times about the science and controversy surrounding GMO crops.  She builds the article around the worldwide problem of citrus greening, but nicely builds in abroader story about GMOs in general. Another great source for learning more about the GMO controversy is the book Tomorrow's Table , by Pamela Ronald and Raoul Adamchak. My own take on GMOs so far: The hysteria against them is likely overblown, but the extraordinary promises by technological optimists are overblown too.  Traditional breeding is a solid and, over the long run, often superior and less costly substitute to GMOs.  What's more worrisome to me is that intellectual property laws and regulatory costs may be acting to concentrate the seed business and make it less competitive.  These later issues are complex, not exactly my forte, and I don't presently see clear answers to any of it. Anyhow, it's nice to see good reporting on an evocative topic.

Commodity Speculation or Market Power?

After seeing how much Goldman profited from selling MBS that they knew were junk, it's hard to feel sorry for Goldman receiving so much grief  for its commodity storage and trading activities.  The worry seems to be that because Goldman has become increasingly involved in commodities markets that they must be manipulating prices for profit, and in the process pushing prices away from their fundamental values---ie., supply and demand. Do we actually know whether there is a problem here? It's possible that Wall Street is trying to manipulate the market.  But this is a hard thing to do, even for a really big company, especially one that doesn't produce the stuff it's trying to monopolize.  Also bear in mind that anyone can buy and store commodities, so it's not like there are huge barriers to entry.  Those who have tried to corner commodity markets in the past haven't fared well. My sense is that cornering a commodity market via hoarding is basically impossibl

The Farm Bill, a.k.a Hunger Games

At this point in our broader political discourse, I probably shouldn't surprised about the House's vote on the farm bill, which continues generous support for wealthy farmers and eliminates food stamps.  I'm trying to keep my blogging more positive and analytical than normative.  I think the analysis of this is pretty clear, so not much to say here that others, like Paul Krugman , have already done much better than I can. (Incidentally, the 1400+ comments on that article, many of which look very thoughtful, looks like a record to my recollection). One thing I might add:  In my career studying agricultural policy in the US, I have heard many, many economists of all political stripes lambast our agricultural subsidies.  Greg Mankiw pointed to them as one of the key areas where most economists generally agree.  But I rarely hear economists of any political stripe criticize our food stamp program.  About the harshest economic criticism I've seen as that we should giv

Macro, Multipliers and the Environment

A little follow up from my post the other day :  It's probably going too far to say investment to curb climate change, if made during a depression, is a free lunch.  But certainly the basic benefit-cost analysis for what constitutes the most efficient policy with respect to climate change, or any other environmental or public good, changes when there is another massive market failure at play.  Spending to reduce emissions would seem to have two benefits: reduced externalities plus closing the macro output gap. In some ways it feels a little like the so-called "double-dividend" hypothesis: the idea that taxing pollution can solve the environmental externality while raising revenue that can reduce distortionary income or sales taxes.  That rather compelling idea still gets kicked around a lot, and there is probably a small truth to it, although the calculation turns out to be more subtle (see Goulder's review , for example). At first blush, the macro double dividend

Taking action on climate change

Update:  Krugman expanded on the job creation point in his column . The Obama administration is side stepping congress and finally doing something about climate change.  The " action plan " has a nice outline of strategies, but no specifics.  It will be interesting to see what kinds of rules the EPA and DOE roll out in response to this initiative and how they will be justified under existing laws like the Clear Air Act. Precedent for this kind of action was established by the Supreme Court awhile back .  If the Obama administration didn't take action soon, agencies would be sued by environmental groups and forced to do something.  So this kind of thing was bound to happen, one way or another. In response, Paul Krugman makes an interesting and surely controversial point .  The new rules, whatever they turn out to be, will make energy more costly.  That's not to say action shouldn't be taken, but that there are tradeoffs involved with curbing climate change.  

Do journal impact factors distort science?

From my inbox: An ad hoc coalition of unlikely insurgents -- scientists, journal editors and publishers, scholarly societies, and research funders across many scientific disciplines -- today posted an international declaration calling on the world scientific community to eliminate the role of the journal impact factor (JIF) in evaluating research for funding, hiring, promotion, or institutional effectiveness. Here's the rest of the story at Science Daily: And a link to DORA, the "ad hoc coalition" in question. It seems fairly obvious that impact factors do distort science.  But I wonder how much, and I also wonder if there are realistic alternatives that would do a better job of encouraging good science. There are delicate tradeoffs here: some literatures seem to become mired within their own dark corners, forming small circles of scholars that speak a common language.  They review each others' work, sometimes because no one else can understand it, or somet

Consensus Statements on Sea Level Rise

In my mailbox from the AGU : After four days of scientific presentations about the state of knowledge on sea-level rise, the participants reached agreement on a number of important key statements. These statements are the reflection of the participants of the conference and not official positions from the sponsoring societies.   Earth scientists agree that the global sea level is rising at an accelerated rate overall in response to climate change. Scientists have a professional responsibility to inform government, the public, and the private sector about the impacts of rising sea levels and extreme events, and the risks they pose.   The geological record indicates that the current rates of sea-level rise in many regions are unprecedented relative to rates of the last several thousand years. Global sea-level rise has changed rapidly in the past and scientific projections show it will continue to rise over the course of this century, altering our coasts.   Extreme even

Spatial Econometric Peeves (wonkish)

Nearly all observational data show strong spatial patterns.  Location matters, partly due to geophysical attributes, partly because of history, and partly because all the things that follow from these two key factors tend to feedback and exaggerate spatial patterns.  If you're a data monkey you probably like to look at cool maps that illustrate spatial patterns, and spend a lot of time trying to make sense of them.  I know I do. Most observational empirical studies in economics and other disciplines need to account for this general spatial connectedness of things.  In principal, you can do this two ways:  (1) develop a model of the spatial relationship; (2) account for the spatial connectedness by appropriately adjusting the standard errors of your regression model. The first option is a truly heroic one, and most all attempts I've seen seem foolhardy.  Spatial geographic patters are extremely complex and follow from deep geophysical and social histories (read  Guns, Germs

Laboratory Grown Meat: The Next Green Revolution?

From what I've learned about agriculture over the last 10 years, I'm increasingly skeptical that we'll see another green revolution like the last one.  Crop yields for the major staples appear to be reaching agronomic limits in advanced nations.  While there's still room for improvement in developing nations, a lot of the low hanging fruit seems to have been picked.  And then their are challenges with climate change, which could be beneficial in some places, but likely damaging in most places, and possibly severely damaging. So, where's a technological optimist to turn? It seems to me that if we have another green revolution, it's going to look more like this . Right now a 5 oz hamburger, grown in a petri dish rather than scraped off a dead animal, costs a reported $325,000.  That's one expensive burger.  But it is easy to imagine how costs could come down in time. Anyway, there's obviously a lot of uncertainty about this sort of thing, not the lea

How farmers could benefit from fertilizer taxes

Some of the worst water quality problems result from nutrient leaching and runoff from agricultural lands.  Nitrogen and phosphorus applied to cropland and not absorbed by crops in the process of photosynthesis will, one way or another, one day or another, end up in the water.  The same goes for animal waste. The nutrients cause algae blooms, reduced concentrations of dissolved oxygen, and diminished fisheries and ecosystem health (called eutrophication).  While there has been some effort to deal with these problems, I know of no great success stories, and water quality continues to decline in the Mississippi, the Gulf of Mexico, and the Chesapeake, the Great Lakes, and countless other water bodies. One obvious remedy would be to tax fertilizer.  This would be a nearly Pigouvian solution.  Better would be to tax runoff and leaching directly, but that’s basically impossible for practical reasons. The obvious but rarely stated problem is that it would probably r